1 Pu

rs ua n t to thi s g oal, the L eg i sl

atu realso a men de d s ec ti on

11 .00 2 to pr o vid e t he Pu blic Uti l i ty Com m i ss i on of Te x as wi th “ au th ori ty to make a

nd e nf orce rul es n ece ssa ry to protect custom

ers . . . cons i sten t wi th the pub l i c i ntere st.” Tex . Uti l . Code A nn . § 11.00 2(c) (W

est Sup p. 2001 ). 

### TEXA S COU RT O F AP PEAL S, THIR D DISTRIC T, AT AU STIN
NO. 03-01-00195-CV
Reli ant Energy, Incor

porate d, Appellant v. Publi c Utili

ty Commission o f Texas; Off ice of Publi c Utili

ty Counsel ; and Steer

ing Committees f

or the Cities Ser

ved by TXU Electr

ic and Central P ower and Light Company, Appellees

DIRECT APPEAL FROM PUBLIC UTILI TY COMMISSIO N OF TEXAS
In thi s d i rect ap pe al , we

m us t de term

i ne whether th

e Pu bl i c U ti l i ty Com m i ss i on of Texas(t he “Co mmi

ssio n”) er re d in pr omu lgat ingpr ice
- t o - be at rule s t ha t fail to ensure an in itial fuel f ac torab o ve mar ke t co st s. Re liant E ne r gy, I nc o r po r at ed ( “Re liant ”) br ing s t his suit challenging t he
v al i di ty of these rules. Because t he Co mmiss io n a ct ed wit hin its a ut hor ized p ow er s, w e up hold t he price-to-beat regulati ons as en acted. BACKGROUND In 19 99 , t he T ex as Le gis lat ur e a men de d t he Pu blic Uti l i ty Regul ator y A

ct (“PURA”) and en ac ted Ch ap ter 39 “ to prote ct the p ub l i c i

nte res t dur i ng the tran si ti on t o a nd in t he es t ablishment of a f ull y com peti tiv e el ectric power

i ndu stry .” 1 Tex. Util . Code Ann . § 39.001(a) (West. Sup p .2 “Fue l f actor” is a term of a

rt t hat is not stat uto ril

y de fi ned. Ho wev er, the Comm is si on has prescrib ed

to i t a parti cul ar m ean i ng i n i ts sub stan tiv e rul es. SeeTex. Gov’t Code Ann . § 311.011 (We st 1998 ); P.U .C . Su

b st. R. 25 .23 7. R

ul e 2 5.4 1( g) man

da tes uti l i ti es to ut ilize su bst an t ive rule 25.237, its e xisting f

uel f actor rul e, to set the

i ni tia l price-to-b eat f

uel f actor. See P.U .C . Su

b st. R. 25.237(c) (requirin

g util ities to pro ve that the expen ses to be recovered through the fuel f ac torare reas onab l e estim

ates of thei r el i gi bl e f uel ex pen ses duri ng th e peri od the f actor i s to be i

n e f f ect). 3 The pr ice-t o- beat is co mprised of t wo co mpo nent s, t he bas e r at e and the fuel fact or ra t e, and is defi ned as th e c ost at w h i ch an af f i l i ate d r eta

i l el ec tri c p rov i der m us t m ake e l ec tri

ci ty av ai l ab l e to resi dentia l and s mall commercial cu st omer s o n a bundled basis. Tex. Util . Code Ann . 39.202(a) (Wes t Su pp. 200 1) . B undled basis r efer s t o t he r at es c har ged befo re der egu latio n. 2 2001) . As part of the util ity in du st r y de r eg ula t io n, t he Le gis lat ur e c r ea t ed a s t at ut o ry sc he me wher eby t he re gulat ed u t ili

t y indust ry wo uld be separat ed or “unb undled” i nto t hree distin

ct entities: (1) power generation com pani es; (2) retail

el ectric providers (“REPs”); a nd (3) tra nsmission and di stri bu ti on uti l i tie s. Id. § 39.05 1. O nce t he st at ut e g o es int o effe ct , ele ct r ic p r o vid er s fo r mer ly aff il ia ted wi th reg ul ate d uti l i ti eswi l l be req ui red to prov i deel ec tri ci ty to resi de nt ial a nd sma ll comm ercia l cus tomer s at a rate o f s ix

percent le ss than the

rate in ef fect on Jan

uary 1, 1999, adj usted to refl ect the fuel

factor as determi

ned by the C ommission. 2 Id. §§ 39 . 20 2, . 40 6. T his p r ice is referred to as the “ price-to-b eat.” 3 Id. § 39.202. In enactin g the price-to-beatstatute, the Leg i slature in tended for new RE Ps no t affil

iate d wit h t he r egu late d ut ili t y indust ry t o e nt er t he mark et and com pete f or cus tom

er s wi th af f i l i ate d R EPs , those

th at w er e f

orm erl y pa rt of th e b un dl ed uti l i ty companies. The Com

m i ss i on wa s ma nd at ed t o effe ct ua t e a n a cr o ss t he bo ar d s ix pe rce nt red uc ti on to the base rate por tion

of the pri

ce-to-b eat. Id. § 3 9.2 02 (b ). As p ar t of th e g oal to prom ote co mpet itio n, t he Com

m i ss i on wa s g i v en th e e x pr es s a uth ori ty to make adj us tmen

ts to th e f ue l f ac tor porti on of the pri ce-to-b eat. Id. Once establi shed, the price-to- beat i s to remai n i n ef fect for f ive4 In

de term i ni ng whether a

REPhas l

ost f orty pe rce nt of it s c us t o mer ba se , t he Co mmiss io n w ill consider whether

the REP ca

n s how tha t the el ec tri c p owe r con

su m ption of the relev ant customer group se rv ed b y n on af f i l i ate d R EPs meets o r e x ce ed s f

orty perc en t of th e tota l n um b er of ki l owatthours co nsumed by reside nt ial cust omer s and for t y per cent of the dif feren ce between the

to tal num ber of ki l owa tt-h our s c on su

med b y sm al l com merci al cu sto me r s s er

v ed b y th e a f f i l i ate d e l ec tri

c u ti l i ty dur ingthe c alendar y

ear 20 00 m

i nus the a ggre gated load s er ve d b y t he affilia t ed RE P. T ex . Ut il. Code A nn . § 39.20 2(e). 3 years, unless t he aff

il iated REP loses fort y percent of its customers. 4 Id. § 39.20 2(a), (e ). In det er mini ng wh ethe

r the f orty pe rcen t thres hol d has b een

met, the C omm

i ssi on ex cl udes cus tomer s that ar e dr op ped by

th e af f i l i ate d R EP to a provider of

la st resort (“POLR”). P.U.C. Subst. R. 25.41 § (i)(1)(A )-(B), (i )(2). By statute, POL

Rs a re req ui red to off er stan dard r et ail servi cepa ckag esf

or ce r t ain cu st o mer s, as de sig na t ed by t he Co mmiss io n, at a fix ed , no nd isc o un t ab le r at e. T ex . Ut il. Code A nn . § 39.10 6(b ). DISCUSSI ON In three is sues, Rel

ia nt chal le ngesthe Com m i ss i on’ s s cop e of

aut hor ity und er PU RA, b oth expr ess a nd

i m pl i ed . Rel i an t f i rs t con ten dsth at P UR

A re qui re s th e C om m i ss i on to i m pl em en t, as part of the L egi slati

ve sch em e to ens ure a competi

tive m arket after deregulation, an i ni ti al pri ce -tobeat f ue l f ac tor a b ov e m ar ke t cos ts s o as to sec ur e immediate pr ofit s for new e nt ra nt s into t he r et ail el ec tri ci ty mar ke t. Reliant also c ont ests t he vali dity of the Co mm

issi on’s dec ision, when e valuat ing whether incumbent ut ili

t y pro vider s have lost for t y per cent of t heir r eside nt ial and sma ll comm ercia l custo mers, to excl

ude from ma rket share calcul

ations custo mers served by a POLR. Finally

, R eliant contends tha

t rul e 2 5.4 1, a s p rom

ul ga ted by the Com m i ss i on, vi ol ate s th e re as one d j us ti f

i ca ti on re quir ement of Texa s Govern men t Code se cti on 200 1.033. See Tex. Gov’t Code Ann . § 2001.033 (We st 2000 ).5 “Headroom” ref ers to t he m

argin between the pri

ce-to- beat and the n

ew retailer’s costs o f pr o vid ing ele ct r icit y. 4

In det ermin ing whether t he Commi ssion’s rule is va lid, we mus t firs t as ce r t ain whether t he Le gis lat ur e e xp r es sly g av e t he Co mmis sion t he po we rt o gu ar an t ee no na ffiliat ed r et ail e lec t r ic provi ders an i ni tia l prof i t. See Pu blic Util. Comm’n v . City Public S erv. Bd. of San Antoni

o , 44 Sup. Ct. J. 101 4, 200 1 T ex. LEX IS 71, at *15 (T ex. June 28, 200 1) . I f no e xpr ess a ut hor ity is set for t h, we mus t t he n c o nsid er wh et he rt ha t po we ris r ea so na bly ne ces sary

for t he Co mmi

ssio n t o fu lfi

ll the express f unc tion and duties presc

ri be d by the L egi slature. Id. Wh ere such authori

ty ex is ts, a r ul e need onl y be base d on a l eg i ti matepos i ti on of th e a gen cy to be upheld. Chrysler Motors Corp. v. Texas Motor

Veh icle Comm ’n , 846 S.W .2 d 139, 142 (T ex. App. —Aus t in 199 3, no w rit ) ( citing Bullock v. Hewlett-Packard Co. , 628 S.W .2d 754 , 756 (Tex. 19 82)). Administrative Rule

Making Re liant co nt ends t hat t he Co mmi ssio n’s su bst ant ive ru le 25. 41 is vo id beca use t he Co mmis si onfai

led t o inc lud e in it an y mec ha nism t o gu ar an t ee init ial he ad r o o m. 5 This o mission, argues Relia

nt, in val ida tes the rule b ecause a rul e that does not ensure suf fi ci en t init i al he ad room “fa ils to ac com

pl i sh th e le gis la tive goal

of promoting c ompetition.” Stat e adm in is trat iv e agenci es have only those po wer s exp re ssly confe rr ed u po n t hem by the L egi slature. City Public Serv. Bd. of San Antonio , 2001 Tex. LEXIS 71, at *15 (citing Public Util. Comm’n v. GTE-Southwest, Inc. , 901 S.W.2d 401 , 40 7 (T ex. 1 995 ); State v. Pu blic U

til. Co mm’n , 883 S.W.2d 190, 194 (Tex . 1994) ). But an ag ency may also ha ve i m pl i ed pow er s—

th ose th at a rere as on ab l

y n ec es sa ry to car ry o ut t he express resp onsi

bi l i tie s gi ven to i t by the L egi slature. Id. (c iting GTE-S outhwest , 901 S.W .2d at 40 7).5

Howev er, t he law pr o hibit s a ge nc ies fr o m e xerci sing w hat is eff ectivel y a new power, or a po wer contrad i ctory t o t he st at ut e, base d mer ely on a c laim that t he po wer is expe dient for administr at ive pur p oses. Id. (citi

ng GTE-S outhwest , 901 S.W.2d at 407 (quo ting Sexton v. M t. Olivet Cemetery Ass’ n , 720 S.W .2d 129 , 137-3 8 (Tex . App.—A usti n 19 86, wri

t ref ’d n .r.e.))). Here, Texas Uti li

ty Code se ct io n 3 9. 20 2 d ict at es ho w t he Co mmiss io n is t o d et er mine th e p rice -to- b ea

t. See Tex . Uti

l . Cod e A nn . § 3 9.2 02( a), (b ). Th

e s tatute req ui res the Com m i ss i on to se t t he pr ice
- t o - be at at a r at e “ six p er ce nt le s s t han t he affili at ed e lect ric u t ili

t y’s co rr esp ond ing average r es ide nt ial a nd sma ll

comm ercia l rates, on a bun

dle d basis, that were in e ff ect on January

1, 1999, adj usted to ref

l ect the f uel f actor,” as determ ined by the C omm

i ssi on. Id. § 39.20 2(a). Because t her e is no t hing in the st at ut or y languag e pe rt aining to he adroom , we m

ust look to t he

en tire statutory sch em e to de t er mine w he t he rt he Co mmiss io n w as r eq uir ed t o co nsid er he ad r o o m in set t ing the i ni tia l price-to-b eat. See State

v. Pu blic U

til. Co mm’n , 883 S.W.2d at 196. In ascertain in g the scope of an age

ncy ’s authority, we giv

e great wei gh

t to t he contemporaneous construction of a statute by th e adm i n i strati v e a gen cy ch arge d w i th i ts e n f orc em en t. Id. at 197 (citin

g Dodd v. Meno , 87 0 S. W.2d 4, 7 (T ex. 1 994 ); Tarrant Appraisal D ist. v. M

oore , 845 S. W.2 d 82 0, 823 (T ex. 199 3) ). We re co gnize t hat t he Legi sl ature intends an ag en cy cr ea ted to centrali ze experti se i

n a certai n regulator y a

rea “b e gi

ven a l arge degree of latitude in the me thods it uses to accompl

is h i ts regulatory f

unction.” Id. Acco rd ing t o t he Co mmi

ssio n, r ule 25 .4 1 r eflect s a r eas ona ble balance bet wee n t he compe t ing int er es t s o f RE Ps an d c us t o mer s— na mely, fo st er ing co mpe t it io n w hile s imult an eo us ly providi ng cus t omer s a p ro mpt re duc t ion fro m reg ulat ed r at es. Reliant do es no t co nt est t he Commi ssion’s power t o establish the i ni tial price-to-beat. Instead, Reli ant conten ds th at t he6

Com m i ss i on was required

t o inc lud e in rule 25.41 a m echan is m gua ranteein g that t he price-to- beat wou l d b e a b ov e m ar ke t cos t an d th at, i n f ai l i n g to do so, it ignored

t he legislat ive go als und er lyi ng PURA an d d er eg ul ati on —e sta b l i sh i n g a com pe ti ti v e e l ec tri ci ty mar ke t. PURA encompasses competin

g policy considerations: ele ct r ic co nsu mer s’ int er es t in lowe ring co st s ver sus elect ric r et ailers’ int er est in est ablishing co mpet itio n. T hi s C ourt doesnot de cid e ma t t er s o f po licy. Ou rr o le is lim ited t o e valuat ingwh ethe r the C omm

i ssi on acted con

trary t o the stat ut e. Reliant ar gue s t hat in set t ing t he initial pr ice-t o- beat , “t he Co mmi ssio n co uld have provided a mecha nism that wo uld have establ is hed an adequate margi

n be tween the pric e-to -beatand t he ma rket cost of power,” yet “the fi nal rule contai

ned n o pro vi si on ensuri

ng adequate i

ni tial he adroom .” Reliant co nced es t hat t he Comm is si on had the authorit

yt o s et t he i

n i ti al pri ce -to- b ea

t. Al thoughthe

Com m i ss i on could

ensu readeq ua te i n i ti al h eadr oom , nothi

n g i n th e statu te requires

it to do s o; nei

ther can such

a requirem

ent be f ound upon exam

in ation of the en

tire statuto ry s chem

e. Theref ore, weca

nn ot sa y tha t the Com m i ss i on e rre d by not including a p ro vision gu ar ant eeing new en tra n ts adeq ua te in itial headroom to secure a profit. Accordi ngl y, Rel ia nt’s f irst i ssue i s overruled. Provider of

Last Resort Reliant next contends t hat, because the PURA pro vides no basis f or excludin

g POLR cus tomer s from

the target fort y pe

rcent aff il ia ted REPred

uc ti on rate calcul

ation, rule 25.41 is i nva li d. Here, Re l i an

t as se rtsth at, to th e e xten

t th e C om m i ss i on exercise d a

n i m pl i ed pow er to insert a no nsta tutory excl us i on i n th e ru l e, th e C om m i ss i on overs tepped i ts authority . In d eciding w het her t he C om m i ss i on ex cee ded i

ts authority

, we as k i f the ru l e i s i n h arm ony wi th the gen eral statutory obj ecti ve s. Chrysler Motors

Corp. , 846 S.W.2dat 141. The stated purpo se of PURA Chapter 397

is to faci li tate t he transition between the re gul ated an d dere gul ated uti l i ty m arket. SeeT ex . Ut il. Code A nn . § 39.00 1(a). Reliant argues that excl udin g POLR customers f

rom the f

orty pe rc ent target cal cul ati on th wa rtsthe overal

l i nten t of PUR A s ecti on 39.2 02(e), wh ich , Re liant as se r t s, “is s imply to en su reth at a threshol d percentage of the resi dentia l a nd sm al l c omm ercia l loads f ormerl y s erved by i n teg ra ted uti l i ti es i s s er v ed b y en ti ti es oth er t han

the aff il ia ted REP before pric e-to -beat re st rict ions ar e lift ed . ” T he Co mmiss io n r es po nd s by c laiming t ha t t he PO LR pr o visio n d ire ct ly serves t he le g i slativ

e purpose of

the statute by

counti ng onl y those customers l

ost to new R

EPs thro ugh the competitive process.

In const ruing the Co mm

issi on’s authority, wem

us t l ook to the s tatute

asa w hol e, n ot se cti on 39 .20 2( e) i

n i sol ati on . It i s u n di spute d th

at th e i n te n t of PU RA i s to pr ov i de

a smooth tran si ti on f rom a regul ated uti l i ty i ndu stry to a dereg

ul ated one. We

can not requ i re the Leg i slature to include e ver y det ail and antic ipa te all unf oreseen ci rcumstances i

n statutes de l eg ati

n g a uth ori ty to t he Co mmiss io n. T o do so wo uld defea t t he pu rp os e o f delega t ing legislat iveauth ority . Railroad Comm ’n v. Lone Star

Gas Co. , 844 S .W.2d 679, 689 (Te x. 1992). One of the bi ll ’s sponsors, Rep re sent at iveWol ens, com me nted at the H o us e f

l oor d i sc us si on on Ma y 20 , 19 99 th at t he de reg ul ati on st at ut e is inte nd e d t o g ive co mpet ito rs a n op po rt unit y to ent er and c omp et e in the el ec tri ci ty market. He e xplained t hat t he fo rt y per cent pr ovisio n was t o be used as a t o o l t o as ce r t ain ma rket pow er : “ W e s ay

th at as a ma t t er o f mar ke t po we r , if t he inc umb en t lo se s 4 0% o f t he ir cus tomer s, com

peti tion be gi ns and then they

can l ower the i

r price.” These co mments bo lste r t he Co mmi ssio n’s ar gument t hat t he f orty pe rce nt provi si on was in tended to be used as an i

ndicator for a functioningcom peti tiv e m arket. Ex cl udi ng c ustom ers6 Pr o po se d r ule 25 . 41 , r ela t ing t o t he pr ice
- t o - be at , wa s p ub lis hed i n the Texas Register

on Novem ber 20, 2000. Initial

comm ents on the rul e were fi

le d De ce mbe r11 , 20 00 by ap pr o ximat ely thirteen in terested o rgani

zations. Repl

y c omm ents were f

il ed on January

2, 2001. Th e C om

m i ss i on he ld pu blic heari

ngs on proposed rule 25.41 on Jan uary 11th an

d 22nd, 2001. Representativ es f rom ap pr o ximat ely

fi fteen i nterested parties and organi zations attended the Jan

ua ry 11 t h he ar ing wh ile 8 served b y a P OLR is c on siste

nt wi t h t he o ver all legislative sc heme o f calibrat ing t he co mpet itive ma rket pla ce. A rule need

only be b ased on a l

egi tim ate position of

the agency

to be uph el d; i t “need not be wi se, desi

rable, or even nec essary .” Chrysler Motors Corp. , 8 46 S .W. 2d a t 142 . T hus, t o t he ext ent t hat t he Com

m i ss i on e xe rci se d a n i m pl i ed pow er i n e xc l udi ng POL Rs f rom th e th re sh ol d f orty per cent deter mi

nation, we cannot say su ch ac ti on i s i nc ong rue nt w i th th e l eg i sl ati ve pur pos e of promoting com

petition. Theref

ore, we o verrul e Rel

ia nt’s POLR i

ssue. Reasoned Justification

One of the stat ed purpo ses o f the APA is t o p ro vide fo r p ublic par t icipat ion in t he ru lemaking proces s. SeeTe x. G ov’ t Co de Ann. § 2001.001. Accordin gly , sections 2001.021-.034 establi sh a sy ste m of i n f orm al or “ n oti ce -a n d- com men t” rulem aki ng. Id. §§ 2 001 .02 1-. 034 ; see also Unified Loans, Inc. v. Pettijohn , 95 5 S . W. 2d 64 9, 65 1 ( T ex . Ap p. —A us t in 1997, no pet.) . In order to adopt a rul

e, an agen cy m ust prov i de: (1 ) pub l i c notice ; (2 ) anopp ortunit y fo ran d fu ll con si de rati on o f co mment s; an d ( 3) a r ea so ne d ju stif ic a tion f or the rul e en acted. SeeTex. G ov’t Code Ann. §§ 2 001 .02 3, . 029 , . 033 (West Sup p. 2 001 ); see also McCarty v
. Texas Pa rk

s & Wi ld li fe Dep’t , 919 S.W .2d 853 , 854 (Tex. A pp.—A usti n 19 96, n o wri t). Relia nt does not t ake i ssue wi

th whether

the Comm

is si on satisf

ie d th e r eq ui re men ts th at i t provi de pu bl i c notice and an opportuni

ty f or com men ts be f ore adopti

ng th e pri ce-t o-bea t rules. 6 The controversy i

nstead con cern s w he the r th e C om m i ss i on provi de d a

rea son ed j us ti f i ca ti ono nly

abo ut eight wer e pr ese nt at the h eari ng on the 2 2nd . Relia

nt partici pated in both publ ic heari ngs and the i ni tial comm ent proceedin

g. The fi nal order was issue d March 20, 2001. 9 f orrule 25 . 41 . T his is the f irst tim e that we have b een ex

pli ci tly calle d upon to construe the reasoned j us ti f i ca ti on requi rem en ts si nc e the 1999 a mendm en ts to the A

PA. Af ter a ca re ful review of t he chan ges to section 2001.033, we concl ude that the Legis la

ture did not in

tend to effectuate a m

aterial chan ge. To sat isfy the re aso ned jus t ifi cat ion r equ irement , a n age ncy’s o rd er ado pt inga r ule must explain ho w and why the agency reached the c oncl usi on i t di d. See National Ass’n of Indep. Insurers v. Texas Dep’ t of I ns. , 925 S.W.2d667, 669(Te x. 199 6) ( “ NA II” ). A rea son ed j us ti f i ca ti on must i nc l ude: (1) a s

um mary of c omm en ts the a gen cy rece i ve d f rom i ntere sted pa

rtie s; (2) a s

um mary of the f ac tua l basis f or th e ru l e; an d (3 ) th e re as on s w hy the agency di sagree s with a par ty’s commen ts. Tex . Gov’ t Code A

nn . § 2001 .0 33(1) ; see also Texas Hosp. Ass’n v. T exas Workers’ Comp . Comm ’n , 911 S.W .2d 884 , 886 (Tex. A pp.—A usti n 19 95, wri

t deni ed). In addi ti on to these threecri

teri a, th e age nc y m us t prov i dea re as one d j us ti f

i ca ti on f or t he rule as

a wh ole . See T

exas Hosp . Ass’

n , 911 S.W.2d at 886 (citin g Railroad Comm’n v. Arco Oil & Gas Co. , 876 S.W .2d 473 , 492 (Tex. Ap p.— Aust in 1994, writ denied) ; Chrysler Motors Corp. , 846 S.W.2d at 143). By requi rin g an agency to expressl

y s tate a reas oned

j usti f i cation f or a rule, th e L eg i sl

atu resou gh t to b ri n g th e dec i si on mak i n g p roc es s i

n to the ope n. SeeArco , 876 S.W.2d at 480 ; see also NAII

, 925 S.W.2d at 669(“ Re qui ri ng an ag en cy to de mons

trate a ra ti ona l con ne cti on between th e f ac ts b ef orei t an d th e a gen cy ’s ru l es pr om otes pu b l i c acc oun

tab i l i ty an d f ac i l i tate s j udi cial revi ew.”) .7 See also Ron L . Bea l , The Scope of Judicial Review of Agency Rulemaking: The Interr elationship of Legislating and Rulemaking in Texas , 39 Ba yl or L. Rev. 597, 688 (1987) (“[ T] he test o f s

ubstan tial com pl i an ce sh oul d n ot al l ow a n ag en cy to ‘ f i l l i n th e b l an ks ’ w i th mean in gless rhetoric and t her eby frust ra t e t he legislat ive intent of r eas one d de cision mak ing. T he legislat iveintent undisp ut ably requ ires a foc use d ana lysi s by the ag en cy o f all r ele va nt fac t ua l, policy and l egal i ssues re sul

tin g not onl y i n a j usti f i cation, b ut a rea sone d j usti f

i cation of the ru l e.”). 10 An age ncy ru le not ado pt ed in su bst ant ial compliance wit h t he r ulemaking p ro visions of the APA sect ion is v

oidable. Tex. G ov’t Code A nn . § 2 001 .03 5(a

). Th e re as one d j us ti f

i ca ti on re quir ement im

posed by section 2001.033 conf

in es a revi ewi ng court’s in

quiry to the fac e of

the order fina lly adopti ng th e rul e. SeeArco , 876 S.W .2d at 48 0 (ci tin g Ron L. Be al , The Scope of

Judicial Review of Agency Rulemaking: The Interrelationship of Legislating and Rulemaking in Texas , 39 Ba y l orL. Re v. 59 7, 6 90 ( 198 7)) ; see also Methodist Hosps. v. Industrial Accident Bd. , 798 S.W.2d 651, 65 9 ( T ex . Ap p. —A us t in 1 99 0, wr it dism’d w. o. j.). In Methodis t Hospita ls , thi s Court hel d that the
que sti

on o f su bst an t ial c o mplia nc e . . . is a qu es t io n o f law t o be de t er mi ned s o lely fr om t he fa ce o f t he [ ad o pt ing ] o r de r. . . . S o mu ch is n ec es sa r ily i m pli ed b y th e st atu te itse lf. Su bst ant ial compliance is not a qu est ion o f fact , t o be det er mined by evi dence addu ce d sub se qu en

tl y i n a r ev i ewi n g c our t, co ncer ning w

hether the agency had unstated

factual bases f or its rule or unstated

re as on s f or di sa gr ee i n g w i th pa rty submissions and propo sals, and w hat these w

ere in fact , or whether an y stated factual bases or re aso ns for disag re eing were in factco nsider ed a nd accepted by

the agency on sufficient evidence . 798 S.W .2d at 65 9 (em

phasi s i n ori gi na l). Theref ore, to s ub sta

n ti al l y com pl y wi th th e reasoned j ustif

ic ation requi

remen t, t he f our corne rs of the agen

cy ’s f in al noticemust prese nt the agen cy ’sj usti f i cation i n a “re l ati ve l y clear, precis e, and logi cal

f ash i on.” 7 Arco , 876 S.W .2d at 49 2. F ur t he rmore, an agency’s order must11

accomplish

t he legislat iveobje ctive s un de r lying t he r ea so ne d ju st ifica t io n r eq uir eme nt an d c o me fa irly wit hin the characte r and scope o f each of the stat ute’s r equ irement s i n speci fi c and un am bi guous terms. See N

AII , 9 25 S .W. 2d a t 669 (c iting Arco , 876 S.W.2d at 491; Methodi st Hosps. , 798 S.W.2d at 65 4) . T he es se nt ial le gis lat ive o bje ct ive o f t he r ea so ne d ju st ifica t io n r eq uir eme nt is
to give noti

ceof the f ac tua l , pol

i cy , an d leg al basis f or th e ru l e, a s adop ted o r constru ed by

the age ncy, in light o f all the evid ence gat her ed by t he ag ency and subm itted by inter est ed p ar t ies du ring t he co mmentpe r io d. T his o ve r all obje ctive can be b rok en dow n i n to two f un da men tal goal s of the rea son ed j us ti f i ca ti on re qui re men t: (1) to en su reth e a gen cy f ul l y con si dere d th e c om men ts s ub m i tted an d ( 2) to provide t he fa ct ua l ba sis an d r at io na lit y o f t he rul e a s d et er mine d b y t he ag en cy. Arco , 876 S.W.2d at 491.

We reviewa

ch al l enge to the re ason

ed j usti f i cation req

ui rem en t usi ng a n “ arb i trary and capric ious” stan

dard, with n

o presumption tha

t facts exist to support t he agen cy ’s order. See Tex as Hosp . Ass’

n , 91 1 S. W.2d at 887 ; see also Arco , 87 6 S . W. 2d at 49 0- 91 . I n a pp ly in g a n arb i trary and capricious t est t o ag ency rulem aking, we examin

e whet her t he agency’sex pl an ati on of t he facts an

d policy concerns i

t reli ed on when

it adopted the rule dem

onstrates t hat the ag en cy considered

all the fac t or s re levant t o t he o bject ives o f the age ncy’s de legat ed r ulemaking au t ho r it y, and engage d i

n re ason ed de ci sionm

aki ng. See Arco , 876 S. W. 2d at 49 1. An a ge nc y ac t s a r bit r ar ily if i n m ak i ng a d ec i si on i t com m i ts a ny of the fol lowi ng errors: (1) om

i ts f rom i ts c ons i de rati

on a f ac tor that the Legi sl ature intende d the agency to co nsid er

i n th e c i rc um sta n ce s; (2 ) i

n cl ud es i n i ts con si de rati on an i rre l evan t f ac tor; or( 3) r ea ch es a c o mple t ely u nr ea so na ble r es ult aft er we igh ing o nly re levant f actors. State

wide C onvo y Tra nsps . Inc. v. R ailr

oad C omm’n , 753 S.W.2d 800, 804 (T ex.12

Ap p. —A us t in

198 8, no writ ); see also Bullock v. Hew lett-Packard Co. , 628 S.W.2d 754, 756 (T ex. 1982)(stati

ng a rule i s arb i

trary and capri cious wh

en i t la cksa legi tim ate rea son to su

pport i t). As se t out i n th e U ti l i ty Co de, t he Co mmi

ssio n’s st at ut or y mandat e is “t o p ro t ect t he pu blic i nte res t dur i ng the tran si ti on to a nd i n th e e sta bl i sh men t of a ful ly competi tive e le ctric power i ndu stry .” Tex . Uti l . Code A nn . § 39.00 1. The

Leg i sl ature del egatedto the Comm is si on the power to adopt ru les pu rsu ant to thi s m andate. Id. § 11 .0 2( c) . I n par t icular , t he Co mmi ssio n must set t he price-to-beat by d ec r ea sin g b as e r at es by s ix percen t an

d a dj us ti ng the f ue l f ac tor to ac cou

nt f or chan ges i n the m arket. Id. § 39.202 . Thus, wi thin the four corners of the Com mi ssion’s order ado pt ingthe price-to-beat rules, we m ust be abl e to det ermi

ne that the Comm

is si on considered

and fou nd f ac ts to supp ort i

ts dec i si on tha t the i ni ti al pri ce -to-b ea t ne ed not i nc l ude su f f i ci en t he ad room to en su ren on af f i l i ate d R EPs wou l d r ea l ize a p rof i t. To de t er mine w he t he rt he Co mm iss io n’s order ado pting the pri

ce-to- beat rules satisf ie s t he r eas one d just ifi

cat ion r equ irement of

the APA , we consi der each sub stantiv e el em ent set out in the statute. SeeTex. Go v’t C od e Ann. § 2 001 .03 3; see also Method ist Hosps. , 798 S.W.2d at 659. T he firs t ele men t is “a su mmar y o f co mment s r ec eiv ed fr o m pa r t ies int er es t ed in the rule that shows the nam

es of i nterestedgroups or associ ations of feri ng com me nt on the rule an

d whether they were for or again st its adoption.” Id. The C om m i ss i on ’s ord er sets o ut e x

pr es sl y an d a t so me l en gth t he i nf orm ati on r eq ui red by the f i rs t el em en t. Be ca us e R el i an t doe s n ot compl ai n that the s um mary of c omm en ts i s ab sen

t from the orde r; w e need n

ot consi der thi s i tem f urthe r. The crux of R el i an t’s cha l l enge con cerns the sec ond a nd th i rd el em en ts of the reasoned j us ti f i ca ti on re qui re men t: “a su mmary of t he factual basis f or t he rule as adopted whi ch dem onstrates a r at io na l co nne ct io n be t we en t he fac t ua l ba sis for t he r ule and t he r ule as ado pt ed” and “the re aso ns8 In i

ts bri ef , Rel i an t comm en ts, “T he Co mmiss io n u nd o ub t ed ly reali zed that t he m

argin between an af f i l i ated R EP’s com modi ty c osts an

d i ts pri ce-to-b eat m

ay be ne gati ve .” 13 why t he ag en cy d isa gr ee s w it h p ar t y su bmis si onsan d pr op osals.” Id. Reliant co nt ends t hat t he ado pt ingo r de rfails t o ex pla in w hy t he Co mmiss io n r eje ct ed pr o po se d s o lu ti on s that wo uld have remedi ed the problem

of i nadequate hea

droo m. In pa

rticular, Reli

ant argues that the order f ai l s to dem on str ate an a deq uate consideration of lack of an in itial headroom am

ount t hat would ensure a pr o fit ma rgin and en courage com

pe ti ti on. Re l i an

t con ten dstha t the sta tem en ts of j us ti f i ca ti on in the ado pt ingord er

ar e m er el y con cl us ory an d do n ot s ub sta

n ti al l y com pl y wi th the rea son ed j us ti f i ca ti on re quir ement of the A

PA. Rel ia

n t recognizes that the Comm is si on did c onsi der that t he i ni tial he ad room mi ght be b el ow market val

ue. 8 Relia nt goes on to comm

ent, however, that t he “r ule sho uld ha ve be en draf ted i n a way that woul

d ha ve av oid ed thi s prob l em .” The order acknowledges that determi ni ng the appr o pr iat e me ch an ism t o us e in adjus t ingt he fuel fact or po rt ion o f the pr ice -t o -b ea t “wa s by fa r t he mo st co nt ro ver sial a sp ec t o f” rule 25.41. Th e Co mmiss io n u r ge s t ha t se ve r al p o r t io ns o f t he o r de rad o pt ing t he pr ice
- t o - be at rule sat isfy the r eas one d just ifi cat ion r equ irement . S pec ifi cally, t he o rd er re co gnizes t hat t he la ck of headroo m dem

onstr ates t hat the eco nomi cs o f se rvi n g [ pri ce -to- b ea

t] cus tomer s ma

ke[s] it unl

ike ly that . . . cu st o mer s w ill ben efit fr o m co mpe t it io n. I t is il logical to remedy

this p r o ble m by

in creasi ng the [pri ce-to- beat] to a l evel that exceeds th e r ate tha t the se cu stom ers wou l d have p ai

d w i th c onti nu ed reg ul ati on in or der t hat t hey can be nefit fro m compe t itio n. T his la nguage precisel

y s tates t he reasons

why the new rul

es were adopted, n am

el y to en sure cus t omer s will realize a ra t e r edu ct ion aft er der egu latio n.14 Ad di t io na lly, the Commission poin ts out tha t rul e 2 5.4 1(g) au

thor ize s th e C om m i ss i on to ma ke fuel factor adjustm ent s in thr ee s itu at ions: (1 ) if the affil iate d RE P d emons t ra t es t hat t he exist ingf ue l f ac tor doe s n

ot adeq ua tel y ref l ec t si gn i f i ca nt c ha ng esi n th e m ark et p riceof natural gas and p ur chas ed e ner gy; (2 ) u po n a fi ndi ng by the Comm

is si on that t he affilia t ed RE P w ill be u na ble to mai ntain i ts fin anci al i ntegrity; or (3) the Commission m ay adj ust t he price-to- beat under PURA se cti on 39.262, t he “

true-up” pro vi sion. The Comm issi on cont ends that t hesepr ov i si on s j us ti f y i ts de ci si on not t o inc

rease the in

iti al he ad r o o m in t he pr ice
- t o - be at rule be ca us e t he y pr o vid e v iab le alte rna t ives t o s et t ing an ar t ifi cially high pr ice-t o- beat as a means o f ensur ing co mpet itio n. These comm

ents provi de a reasoned j ustif ic ation f or t he Comm

issi on’s concl usi on that t he alt er na t ive mec ha nisms pr o po se d in li eu of cr ea ti n g g re ate r headr oom

ar e m oreef f i caci ous to accomplish

the dua l l eg i sl ati ve pur pos e of prov i din g c us t o mer sa ving s a nd en co ur ag ing r et ail co mpet itio n. The Comm is si on anal

yz ed whether other me asures would a dequat ely en sure com pe ti ti on and it s o rd er explains wh y re qui ri n g suf f i ci en t i n i ti al h eadr oom

to en su repr of i tab i l i ty is unn ece ssa ry to the le gis la

tive s chem

e of deve lopi

ng com petition an

d prot ectin

g c onsu mers. See M ethodist Hosps. , 798 S.W.2d at 659. T hus, thi s portion of the rul e satis fi es the r eas one d justif ication requirem

ents. Reliant n ex

t ar gu es th at th e or der f

ai l s to j us ti f

y th e r ej ec ti on

of an el ec tri ci ty com m odi ty in dex requested by

Relia nt and other parties. The Com mi ssion argues that its responses to ar gument s made by inter est ed p ar t ies fully explain the reasons i t concluded that the rule

as enacted adequately

encourages compe

tition. For exam

ple , in its order, the Comm

is si on expl

ai ned: It is not app ro pr iate t o mo ve to such an in dex un til the stranded

costs of the aff

il ia ted PGC are fi

nal iz ed as any

stranded cost charges . . . will n ot be f in al iz ed until stranded15

costs are fi

nal iz ed. At that tim

e, if the price to beat

for an af fi li ated REP is i

n dan ger of bei ng be low m

arket because of h

igh mark et pr ices fo r g ener at ion, t he r et ur n of a ny excess mitigat ion, or nega t ivestranded costs if the comm

is si on determi

nes that it has t he auth ority

to requi re the return of negati

ve stranded costs, can b e used to address concerns ab out he ad

room an d there by m i ti ga te the e f f ec ts of hi gh mark et p rice s on price to beat cust omer s. S ubsect ion (g )( 1)( F) has be en ad de d t o allo w fo rt his t ra nsitio n and pr esc ribes t hese pr eco ndit ions and the m ethods by whi ch an aff il ia ted RE P must t ra nsitio n t o t he us e o f an elect ricit y index. Thus, the Commission was convi nced that adeq uate safeguards exist for offset t ingchan

ges i n m arket co ndit ions so that t he price-to- beat need not be ado pted t o t he excl usion of al

l other remedies. These sta tem en ts sec ur e t he legislat ive objec t ives t hat unde rlie t he rea son ed j us ti f i ca ti on r eq uir eme nt . While t he reasoned

j us ti f i ca ti on r eq ui rem en t doe s n ot de man d that a n a ge nc y prov i dede tai l ed f i nd i ng s of fact and concl usi ons of l aw, see Chrys ler Motors Corp. , 846 S.W.2d at 143, an agency mus t pro vi de
m ore than a gen eral ref eren ce to statutory

authority , Arco , 876 S.W.2 d at 494 ; see also Beal , 45 Ba y l orL. Rev. at 33 (“Mere rei terat ion of

the statut ory language

does n ot ensure that the agenc y reli ed on a nd i nf orm ed i nte res ted pa rti esof the un de rl y i ng f ac tua l basis f ort he r ule, acc or ding t o t he legislat iveo bje ct ive . ”) . He r e, t he Co mm is si on sat i sf

i ed th i s b ur den , hav

i n g n oted i n i ts o rd er i ts reasons f or disagreei

ng wi th the subm

is si ons and proposals

it recei ved. Reliant’s f

i na l con ten ti on is that, in rej ectin

g a move t o a n elect ric co mmodit y index, t he Com m i ssi on f ail ed to j ustif

y i ts di sreg ard

f or th e b al an ce d p l an th e L eg i sl

atu recr af ted to s ti m ul ate co m pe ti ti on in the period bef

ore t he 2004 true-up and to pro tect affi li ated REPs from dev

astat in g losses. T his a r gu men t is i

nextri cab l y l i nke d to the Com

m i ssi on’ s rej ection of

an electrici ty i nde x. In it s or der, the Co mm

issi on explained that it disagreed with Reliant’s po sitio n beca use aft er “200 2, t he ma rket pr ice o f [ ele ct r icit y] g en er at io n w ill like ly be s et by g as - fire d g en er at io n, an d a s s uc h, it is appr opri ate

t o a pply t he cha nges in the market pr i ce of na tural gasand purcha sed

energy to the en tire16

fuel factor in order t o mai

ntain the le vel o f he ad r o o m i n the pr ice to beat. ” The Co mm issi on’s re aso ns f or i ts re j ec ti on of an electr ic comm

odit y i ndex is di rect ly respo nsiv

e to Reliant’s expresse d con cern s a n d s atisf i es th e r ea son

ed j us ti f i ca ti on re qui re men t. CONCLU SION Having overruled Re li

an t’ s three i ssues, we sustain the val idi ty of rul e 25.41 as enac t ed by t he Co mmi

ssio n.

Jan P. Patterson, Justice Be f ore J us ti ce s K i dd, Ye akel

an d Pa tters on Af fi rmed File d: Novem

ber 15, 2001 Publish